Australian R&D Benefits for Singaporean Businesses

If you’re a Singaporean business unable to claim R&D tax deductions from your government due to stringent eligibility criteria, or just dissatisfied with the fiscal incentives for innovation creation, then you will be looking at Australian R&D benefits for Singaporean businesses.  In particular the 2020-21 Australian Budget will be positive news.

Aiming to remain an attractive option for foreign investment in R&D, starting from 1 July 2021, the federal government will set the refundable R&D tax offset at 18.5 percentage points above the claimant’s company tax rate, for companies with aggregated annual turnover of less than $20 million.

In addition, the $4 million cap on annual cash refunds that the government had been discussing, will not proceed.  For larger companies (those with aggregated annual turnover of $20 million or more), the Government will reduce the number of intensity tiers from three to two, which will provide greater certainty for R&D investment, while still rewarding those companies that commit a greater proportion of their business expenditure to R&D.

Here at Fullstack we have Singaporean clients that have already established R&D bases in Australia and we often receive inquiries from other Singaporean and foreign businesses wanting to know about the Australian R&D benefits for Singaporean businesses. The feedback we get from many of our clients indicates that what attracted them to us in the first place is our reputation in the Startup and innovation space — hallmarks of what the R&D Tax Incentive (RDTI) aims to promote. So if you’re a Singaporean business looking at setting up an R&D base in Australia, let’s take a look at what you need to know, what the benefits are, and how we can help.

As per the legislation relevant for a Singaporean business (355-35(1) of ITAA 1997), you are classified as an R&D entity (and, therefore, able to take advantage of the RDTI) if you are incorporated under foreign law but an Australian resident for income purposes or incorporated under foreign law and a resident of a country with which Australia has a double tax agreement (which Singapore does).

If you are an eligible company and have a turnover of less than $20 million, you will receive a refundable tax offset, which allows the benefit to be paid as a cash refund if you are in a tax loss position. All other eligible companies receive a non-refundable tax offset to help reduce the tax they pay.

The example below shows one of the ways in which a Singaporean company might benefit from the RDTI through an Australian subsidiary. The example assumes that the Singaporean company (Company S) and the Australian company (Company A) and any other companies that the two companies are associated with have a collective aggregated turnover of less than AU$20 million. The Australian company is in Tax Loss.

Example:

Company S, a biotech company incorporated in Singapore, establishes an Australian subsidiary. The subsidiary, Company A, is an Australian company wholly owned by Company S and qualifies as an R&D entity.

Under an agreement between the two parties, Company A agrees to undertake R&D activities in its Sydney office solely for the benefit of Company S, which it does so by spending $500,000 on eligible R&D activities during FY 2020. The consideration is at “arm’s length” (as per definition in the legislation). Company S is legally entitled to all intellectual property arising from the R&D activities. Company S is also connected with Company A, as Company S controls Company A.

The R&D activities are being conducted solely for Company S; therefore, Company A will be able to potentially claim a $217,500 cash refund (43.5% of the $500,000 R&D expenditure), provided all other requirements for claiming the R&D tax incentive are also satisfied and the company has sufficient tax losses.